Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
The World of Retail: Hardlines vs. Softlines
The world of retailing is quite vast, to say the least. In fact, the retail business is, by far, one of the largest and most diversified sectors that exists, covering a very broad range of products from clothing and footwear to appliances/electronics and home-related accessories. The Hardlines group consists of a hodge-podge of specialty retailers that offer non-apparel merchandise—“hard goods”—such as home furnishings, electronics, jewelry, and sports equipment. By contrast, Softlines retailers are specialty retail companies that manufacture and sell apparel, accessories, and footwear—“soft goods”. Hardline and Softline retailers often sell merchandise under their own proprietary brand, but may offer other labels, as well. Of course, there is some overlap between the two groups of retailers, as some Hardlines merchants may also sell “soft goods”, and vice versa.
Numerous retailers fall into the Hardlines category. Among them is big-box merchant Best Buy (BBY), which sells a large selection of consumer electronics, computers, appliances, and mobile products and services. After hitting a rough patch recently, the stock is best suited for the long term. Bed Bath & Beyond (BBBY), which sells domestic home-living merchandise, has long-term appeal, too, while competitor Pier 1 Imports (PIR), which offers a range of imported, decorative home furnishings and related accessories, appears to have limited upside potential at this juncture. Investors should also wait for a stock-price pullback on Tiffany & Co. (TIF), best known for its fine jewelry and gift items. Other retailers in the Hardlines industry include PetSmart (PETM), a retailer of pet supplies, food, and services (i.e., boarding, grooming, and veterinary services), whose stock seems poised to climb near term, and videogame seller GameStop (GME), which has all-around investment appeal.
Some Hardlines merchants seem to fit into either category, given that they include “soft goods” in their offerings. Dick’s Sporting Goods (DKS) is a good example. The chain sells an assortment of brandname sports equipment, along with a line of sports-related apparel and footwear. The equity would make a good addition to accounts with a short-term timeframe. Coach (COH) fits the bill here, too, since a range of high-quality handbags, accessories, and outerwear (i.e., gloves, scarves), can be found together with luggage and business cases. Investments in this retailer are best deferred for now.
The Softlines retail segment is just as extensive as the Hardlines group, and includes an array of standalone and mall-based chains, such as ANN Inc. (ANN), which offers a range of professional and casual apparel for women under the Ann Taylor and LOFT brands. Based on its growth prospects, the stock should interest a broad group of investors. Men’s Wearhouse (MW), the largest off-price retailer of tailored business suits for men, meanwhile, is a solid near-term opportunity, while kidswear retailer Children’s Place (PLCE) looks to perform nicely in the years ahead, driven by expansion of its business. On the other hand, The Gap (GPS), a maker of casual apparel, which also owns and operates upscale clothing concept Banana Republic, and value-priced chain Old Navy, could make for a good turnaround play, if certain fashion missteps are corrected.
Teen retailers, such as Zumiez (ZUMZ), a maker of action-sports clothing, footwear, and equipment, and rue21 (RUE), a private-label manufacturer of value-priced fashion apparel and accessories, are housed in the Softlines category, too, as are athletic footwear and apparel chains Foot Locker (FL) and The Finish Line (FINL). Zumiez and Foot Locker may entice those with a short-term view, while rue21 is an overall attractive choice. The Finish Line, however, appears to have little room left to run.
Some Things to Keep in Mind
Investors should understand that a host of factors can influence both the Hardlines and Softlines groups. Notably, retailers within their respective industries are influenced by market and company-specific factors. A good example of a market factor is teen retailers and the consumers they target—adolescents—which tend to be fickle. Fast-changing fashion trends among teens require these players to be extra nimble.
Meanwhile, there are several key terms specific to retailers that industry observers should be familiar with. These metrics often help in the assessment of a merchant’s performance. They include comparable-store sales (a.k.a. same-store sales, or simply “comps”), an underlying statistic that gauges a retailer’s sales performance at stores open for at least one year, and gross margin, the portion of the top line a retailer retains after paying cost of goods sold and other direct expenses. Number of stores is important, too, as it provides some perspective on the size of the retailer, and indicates whether the company is expanding or downsizing. Similarly, square footage is used to calculate sales per square foot, a standard measurement of the success of selling space. Inventory, while common to virtually all industries, has special significance in the retail space, as well. The number can signal trouble if it rises quickly from period to period relative to sales. If it decreases too fast, on the other hand, a retailer can sacrifice sales and market share, as it may not be able to satisfy demand.
Hardlines and Softlines members alike are typically affected by broader economic factors, as well, which, in many cases, have some bearing on stock performance. Especially important, though, is consumer confidence, since it gauges the public’s sentiment on the economy and its direction. The statistic can be very telling, providing clues on consumer spending—a key component that represents some two-thirds of the economy, and is the basic lifeblood of retail businesses.
In the aggregate, these factors dictate whether a retailer, regardless in what industry it resides, will thrive or go out of business. Investors may find more on the Retail Hardlines and Softlines Industries in the Value Line Investment Survey.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.